Monday, April 24, 2017

Meals and lodging provided by an employer may be excludable from the employee's income.

In
certain circumstances, an employer may provide employees with meals and lodging
as part of their employment package.

Generally,
the value of meals and lodging provided to employees is taxable like many other
benefits. However, the Internal Revenue Code provides an exclusion for
meals and lodging that are provided "for the convenience of the employer"
on the "business premises." For lodging, an additional requirement is
that the employee must be required to accept it as a condition of employment.

Convenience
of the Employer

Under
the "convenience of the employer" test, the primary reason for
providing the meals or lodging must be to benefit the employer, i.e., to enable
the employee to do his job. In a special circumstance, meals provided to all
employees may be excludable where more than half of the employees fall under
the convenience of the employer test. For example, if more than half of a
hospital’s employees must be on call at all times, all employees can be
furnished a meal in the hospital because keeping them on the premises allows
them to satisfy work-related obligations. Similarly, a hotel manager who must
be on the premises at all times can be furnished lodging at the location to
enable him to perform his duties. However, for the lodging to qualify for the
exclusion, the employee's acceptance of the lodging must be a "condition
of employment," i.e., the lodging must be necessary for the employee to
perform his duties. It is also important to note that the exclusion only
applies for meals and lodging which is provided in kind: not for cash
allowances for such items.

The
"convenience of the employer" test and the business premises
requirement may be difficult to apply to particular circumstances. With the
ever evolving business environment that we work in today, employers will want
to review and document all the facts involved in providing meals or lodging to
employees.

Employer’s Benefit

If
excludable benefits can be provided to your employees, you should be able to
structure an employee benefit package at a reduced cost to take advantage of
the employee's tax savings. For example, if an employee spends $1,000 on meals
at work he would need to be paid roughly $1,334 in taxable salary to cover this
cost (assuming a 25% income tax bracket). But if the $1,000 in meals qualify as
excludable under the rules discussed above, the employer can provide the meals
directly and offer $1,334 less in salary while maintaining the employee's
economic position.

From
the employee's perspective, the excludable meals should be viewed as a benefit
worth more in equivalent salary than their actual value.

Summary

Employers
that can structure employee benefit packages to include excludable meals or
lodging, should provide the employees with information on the effective value
of the benefit. Keep in mind that these benefits must be for the convenience of
the employer and in the case of lodging, included as a condition of employment.
Before structuring a compensation package the includes meals and lodging,
consult with a qualified tax professional.